BW20030423002003  20030423T110008Z UTC


( BW)(XEROX-CORP.)(XRX) 1st Quarter Results

    Business Editors
    UK REGULATORY NEWS

    STAMFORD, Conn.--(BUSINESS WIRE)--April 23, 2003--

                  Xerox Reports First-Quarter Results

Effective execution, new technology generate positive operational
performance through increased equipment sales, improved marketshare

Xerox Corporation (NYSE: XRX) announced today a first-quarter loss of
10 cents per share, including a previously announced 25 cent-per-share
litigation charge. Increased demand in key markets and strong
operational performance contributed to the company exceeding
expectations in the quarter, excluding this charge.

Revenue from equipment sales is a key indicator of customer demand for
the company's expanded offerings in the office and production markets.
In the first quarter, equipment sales increased 3 percent, a
sequential improvement from the 2-percent decline in the fourth
quarter of 2002. The 3-percent increase reflects first-quarter growth
in color and multifunction and a currency benefit of 6 percentage
points. Total revenue for the first quarter was $3.8 billion, a
year-over-year decline of 3 percent including a currency benefit of 4
percentage points. The decrease in first-quarter total revenue was
primarily driven by declines in the company's developing markets
business and light lens products.

"While the economic environment was more difficult than expected in
the first quarter, we effectively managed this challenge by leveraging
the benefits of our leaner, more flexible business model," said Anne
M. Mulcahy, Xerox chairman and chief executive officer.

Xerox's leading technology in the production color and office color
markets continued to yield strong revenue results with total color
revenue up 16 percent year-over-year, largely due to the success of
Xerox's DocuColor series.

"Through our investments in innovation, we set our sights on markets
with the greatest potential for profitable revenue growth. Our
effective execution of this strategy is generating positive results
through increased equipment sales, improved marketshare and expanded
opportunities to integrate Xerox's suite of services with our
industry-leading technology," added Mulcahy.

The company noted that second-half 2002 marketshare reports show Xerox
gaining ground in key segments of the business including production
color, office color multifunction and office black-and-white
multifunction. First-quarter 2003 installations also grew in these
important markets, evidence of the strong momentum from the 17 new
products launched last year.

For example, production color installs grew 8 percent in the first
quarter led by increased demand for the Xerox DocuColor 6060 Digital
Color Press. The company recently reported that its DocuColor 6060 and
DocuColor 2000 family have surpassed 7,500 installs worldwide, making
them the best-selling systems in their class. According to the latest
industry reports for second-half 2002, Xerox holds the No. 1
production color marketshare position in the U.S. and Europe.

In the office, customer demand for Xerox's advanced multifunction
systems also led to first-quarter install growth. Office color
multifunction installs increased 48 percent and office black-and-white
multifunction grew 15 percent, largely due to the Xerox Document
Centre 500 series launched last year. Building on this success, Xerox
said that it's making a significant office product announcement next
week that leverages the effectiveness of its strengthened operations,
positioning the company to win marketshare and drive future revenue
growth.

The company highlighted several recent customer contracts that
represent the value of Xerox's integrated technology and services,
which enable more efficient workflow in businesses small to large:

    --  Bank of America has engaged Xerox for continued managed
        services and document solutions valued at $50 million over the
        next three years. Xerox becomes the bank's sole provider of
        office digital systems with a contract that includes 6,300
        digital multifunction systems.

    --  In contracts that total $15 million, Arkansas Blue Cross/Blue
        Shield, HealthNow New York Inc. and United Health Services
        have chosen Xerox Global Services to revamp their business
        processes and help reduce document-management expenses by up
        to 30 percent.

    --  In regions around the world, public and private sector
        businesses now depend on Xerox services to manage their
        document-intensive work processes. The company recently won a
        total of more than $13.5 million in technology and service
        agreements with Lloyds Bank of Argentina, the Education
        Department of South Africa, Bosch Automotive in Brazil and the
        Pension Fund of Russia.

For the first quarter, gross margins were up 0.9 percentage points to
41.9 percent. Selling, administrative and general costs continue to
decline and SAG as a percent of revenue was 27.1 percent, a
year-over-year improvement of 3.2 percentage points.

The company reported first-quarter operating cash flow of $159
million. Xerox's worldwide cash position increased to $3 billion at
the end of the first quarter.

Mulcahy added, "Despite economic uncertainty, our significantly
improved operations and the strength of our financial foundation
position Xerox to be even more aggressive in the marketplace with the
industry's broadest portfolio of innovative systems and services."

On Monday, Xerox reported that it was taking a first-quarter 25-cent
per share or $183 million after-tax litigation charge related to the
Berger v. Retirement Income Guarantee Plan litigation, a case brought
against the company's primary U.S. pension plan for salaried
employees. Following the recent oral argument of an appeal from a
district court's judgment, Xerox and external counsel reassessed the
level of probability for a favorable outcome. Under accounting
standards, this reassessment required the company to take a charge for
the amount of the judgment in the case.

For additional information about The Document Company Xerox, please
visit our Worldwide Web site at www.xerox.com/investor.

This release contains forward-looking statements and information
relating to Xerox that are based on our beliefs as well as assumptions
made by and information currently available to us. The words
"anticipate," "believe," "estimate," "expect," "intend," "will" and
similar expressions, as they relate to us, are intended to identify
forward-looking statements. Actual results could differ materially
from those projected in such forward-looking statements. Information
concerning certain factors that could cause actual results to differ
materially is included in the company's Form 10-K for the year ended
2002, as filed with the SEC.

XEROX(R), The Document Company(R) and the digital X(R) are trademarks
of XEROX CORPORATION.

                           Xerox Corporation
      Condensed Consolidated Statements of Operations (Unaudited)

                                                 Three Months Ended
                                                  March 31,
     (in millions, except per share data)       2003   2002   % Change
---------------------------------------------- -----------------------

Revenues
     Sales                                     $1,589  $1,583       -
     Service, outsourcing and rentals           1,917   2,011     (5%)
     Finance Income                               251     264     (5%)
                                               --------------
Total Revenues                                  3,757   3,858     (3%)

Costs and Expenses
     Cost of sales                              1,001  1,022     (2%)
     Cost of service, outsourcing and rentals   1,089  1,162     (6%)
     Equipment financing interest                  92     92       -
     Research and development expenses            236    230      3%
     Selling, administrative and general
      expenses                                  1,020  1,169    (13%)
     Restructuring and asset impairment
      charges                                       8    146    (95%)
     Provision for litigation                     300      -     (a)
     Other expenses, net                          121     98     23%
---------------------------------------------- --------------
Total Costs and Expenses                        3,867  3,919     (1%)
---------------------------------------------- --------------

Net Loss before Income Tax Benefits, Equity
 Income, Minorities' Interests and Cumulative
 Effect of Change in Accounting Principle (b)    (110)   (61)   (80%)
     Income Tax Benefits                          (53)   (23)    (a)
---------------------------------------------- --------------

Net Loss before Equity Income, Minorities'
 Interests and Cumulative Effect of Change
 in Accounting Principle                          (57)   (38)   (50%)
     Equity in net income of unconsolidated
      affiliates                                   14     11     27%
     Minorities' Interests in earnings of
      subsidiaries                                (22)   (24)     8%
---------------------------------------------- --------------

Net Loss before Cumulative Effect of Change in
 Accounting Principle                             (65)   (51)   (27%)
     Cumulative effect of change in accounting
      principle, net                                -    (63)    (a)
---------------------------------------------- --------------

Net Loss                                         $(65) $(114)    43%
     Less: Preferred stock dividends, net         (10)     -     (a)
---------------------------------------------- --------------
Net Loss available to common shareholders        $(75) $(114)    34%
============================================== ==============

Basic and Diluted Loss per share:
     Net Loss before Cumulative Effect of
      Change in Accounting Principle           $(0.10)$(0.07)   (43%)
---------------------------------------------- --------------
     Net Loss Per Share                        $(0.10)$(0.16)    38%
============================================== ==============

     Note: Certain reclassifications of prior year amounts have been
      made to conform to the current year presentation.

(a)    Percent not meaningful

(b)    Referred to as "pre-tax loss" throughout
       the remainder of this document

                           Xerox Corporation
           Condensed Consolidated Balance Sheets (Unaudited)

                                                       March  December
                                                         31,     31,
(In millions)                                            2003    2002
----------------------------------------------------------------------
Assets

Cash and cash equivalents                              $3,035  $2,887
Accounts receivable, net                                2,167   2,072
Billed portion of finance receivables, net                501     564
Finance receivables, net                                2,930   3,088
Inventories                                             1,225   1,231
Other current assets                                    1,222   1,186
----------------------------------------------------- ----------------
  Total Current Assets                                 11,080  11,028
Finance receivables due after one year, net             5,370   5,353
Equipment on operating leases, net                        407     450
Land, buildings and equipment, net                      1,748   1,757
Investments in affiliates, at equity                      551     628
Intangible assets, net                                    351     360
Goodwill                                                1,542   1,564
Deferred tax assets, long-term                          1,624   1,592
Other long-term assets                                  2,672   2,726
----------------------------------------------------- ----------------
Total Assets                                          $25,345 $25,458
===================================================== ================

Liabilities and Equity

Short-term debt and current portion of
  long-term debt                                       $5,122  $4,377
Accounts payable                                          704     839
Accrued compensation and benefits costs                   416     481
Unearned income                                           246     257
Other current liabilities                               1,497   1,833
----------------------------------------------------- ----------------
  Total Current Liabilities                             7,985   7,787
Long-term debt                                          9,193   9,794
Pension liabilities                                     1,701   1,307
Post-retirement medical benefits                        1,258   1,251
Other long-term liabilities                             1,162   1,144
----------------------------------------------------- ----------------
  Total Liabilities                                    21,299  21,283

Minorities' interests in equity of subsidiaries            73      73
Company-obligated, mandatorily redeemable
 preferred securities of subsidiary trusts holding
 solely subordinated debentures of the Company          1,708   1,701
Preferred stock                                           536     550
Deferred ESOP benefits                                    (42)    (42)
Common stock, including additional paid in capital      2,757   2,739
Retained earnings                                         950   1,025
Accumulated other comprehensive loss                   (1,936) (1,871)
----------------------------------------------------- ----------------
Total Liabilities and Equity                          $25,345 $25,458
===================================================== ================

Shares of common stock issued and outstanding were (in thousands)
 741,575 and 738,273 at March 31, 2003 and December 31, 2002,
 respectively.

Note: Certain reclassifications of prior year amounts have been made
 to conform to the current year presentation.


                           Xerox Corporation
      Condensed Consolidated Statements of Cash Flows (Unaudited)

                                                        Three Months
                                                       Ended March 31,
                                                       ---------------
(in millions)                                             2003   2002
------------------------------------------------------- --------------

Cash Flows from Operating Activities
Net Loss                                                  $(65) $(114)
Adjustments required to reconcile income (loss) to cash
 flows
from operating activities:
  Provision for litigation                                 300      -
  Depreciation and amortization                            199    319
  Impairment of goodwill                                     -     63
  Provisions for receivables and inventory                  75    149
  Restructuring and asset impairment charges                 8    146
  Loss (gains) on sales of businesses and assets, net        2    (19)
  Cash payments for restructurings                        (180)  (122)
  Undistributed equity in income of affiliated
   companies                                               (13)   (11)
  Decrease in inventories                                    -     57
  Increase in on-lease equipment                           (36)   (36)
  Decrease in finance receivables                          183    116
  Increase in accounts receivable and billed portion of
   finance receivables                                     (25)    (1)
  (Decrease) increase in accounts payable and accrued
   compensation and benefit costs                         (133)    68
  Net change in income tax assets and liabilities          (78)  (398)
  Decrease in other current and long-term liabilities      (61)   (91)
  All other operating changes, net                         (17)    17
                                                        --------------
       Net cash provided by operating activities           159    143
                                                        --------------

Cash Flows from Investing Activities
  Cost of additions to land, buildings and equipment       (35)   (26)
  Proceeds from sales of land, buildings and equipment       1      3
  Cost of additions to internal use software               (10)   (11)
  Proceeds from divestitures                                 3     45
  Funds placed in escrow and other restricted
   investments                                             (53)   (78)
                                                        --------------
       Net cash used in investing activities               (94)   (67)
                                                        --------------

Cash Flows from Financing Activities
  Cash proceeds from secured financings                    813    511
  Debt payments on secured financings                     (459)  (398)
  Other cash changes in debt, net                         (258)   589
  Dividends on preferred stock                             (11)     -
  Proceeds from sales of common stock                        3      2
                                                        --------------
       Net cash provided by financing activities            88    704
                                                        --------------
Effect of exchange rate changes on cash and cash
 equivalents                                                (5)   (23)
                                                        --------------

Increase in cash and cash equivalents                      148    757
Cash and cash equivalents at beginning of period         2,887  3,990
                                                        --------------
Cash and cash equivalents at end of period              $3,035 $4,747
                                                        --------------

Note: Certain reclassifications of prior year amounts have been made
 to conform to the current year presentation.


                           Xerox Corporation
           Segment Revenues and Operating Profit (Unaudited)

                                       Three Months Ended March 31,
(in millions, except margins)               2003    2002   Change
---------------------------------------- ---------------------------

Revenues
  Production(a)                           $1,065  $1,080     (1%)
  Office(a)                                1,834   1,837       -
  Developing Markets (DMO)                   363     448    (19%)
  Other(b)                                   495     493       -
                                         ------------------------
Total Revenues                            $3,757  $3,858     (3%)
                                         ------------------------

  Memo: Color                               $712    $616      16%

Operating Profit
  Production(a)                              $93     $75     $18
  Office(a)                                  155     107      48
  DMO                                         29       2      27
  Other(b)                                   (65)    (86)     21
                                         ------------------------
Total Operating Profit                      $212     $98    $114
                                         ========================

Operating Margin
  Production(a)                              8.7%    6.9%    1.8 pts
  Office(a)                                  8.5%    5.8%    2.7 pts
  DMO                                        8.0%    0.4%    7.6 pts
  Other(b)                                 (13.1%) (17.4%)   4.3 pts
                                         ---------------------------
Total Operating Margin                       5.6%    2.5%    3.1 pts
                                         ---------------------------
--------------------------------------------------------------------
Reconciliation to pre-tax loss
  Segment Operating Profit                  $212     $98
  Reconciling items:
       Provision for litigation             (300)      -
       Restructuring and asset impairment
        charges                               (8)   (146)
       Restructuring related inventory
        charge                                 -      (2)
  Allocated item:
       Equity in net income of
        unconsolidated affiliates            (14)    (11)
                                         ----------------
  Pre-tax loss                             $(110)   $(61)
                                         ================

(a) In 2003 we reclassified our mid-range color products (11-40 ppm)
    from the Production segment to the Office segment. As a result,
    2002 revenue of $1,093 million was reclassified from the
    Production to the Office segment. The quarterly impact is as
    follows: Q1 02 - $237 million, Q2 02 - $259 million, Q3 02 - $259
    million, Q4 02 - $338 million. Operating profit was reclassified
    for this change as well as for certain changes in corporate and
    other expense allocations. The first quarter 2002 impact is to
    increase/(reduce) segment operating profit as follows: Production
    - ($31) million; Office - $15 million; DMO - $7 million; Other -
    $9 million. The full year impact is to increase/(reduce) 2002
    segment operating profit as follows: Production - ($177) million;
    Office - $122 million; DMO - $28 million; Other - $27 million.

(b) Small Office / Home Office (SOHO) is now reported in Other as it
    no longer meets the thresholds for separate reporting.

    Production: Monochrome 91+ pages per minute (ppm), Color 41+ ppm;
        North America & Europe

    Office: Monochrome up to 90 ppm; Color up to 40 ppm; North America
        & Europe

    DMO: Operations in Latin America, the Middle East, India, Eurasia,
        Russia and Africa

    Other: Paper, SOHO, Xerox Engineering Systems (XES), Xerox
        Technology Enterprises (XTE), consulting, equity income and
        non-allocated corporate items

Financial Review

Summary


                                                     Three Months 
                                                     Ended Mar 31,
          (in millions)                           2003    2002  Change
          ------------------------------------- ------- ------- ------

          Equipment sales                         $898    $876     3%
          Post sale and other revenue            2,608   2,718    (4%)
          Finance income                           251     264    (5%)
                                                ------- -------
          Total Revenues                        $3,757  $3,858    (3%)

          Reconciliation to Condensed 
           Consolidated Statements of Operations
          Sales                                 $1,589  $1,583
          Less: Supplies, paper and other sales   (691)   (707)
                                                ------- -------
          Equipment Sales                         $898    $876

          Service, outsourcing and rentals      $1,917  $2,011
          Add: Supplies, paper and other sales     691     707
                                                ------- -------
          Post sale and other revenue           $2,608  $2,718


Total first quarter 2003 revenues of $3.8 billion declined 3 percent
from $3.9 billion in the 2002 first quarter including a 4 percentage
point benefit from currency. Despite continued economic weakness and
competitive pressures, the first quarter 2003 year over year revenue
decline continued to moderate from previous quarters. The majority of
the revenue decline reflects reductions in our Developing Markets
Operations (DMO) segment as our focus on profitable revenue and
transition to third party financing has resulted in substantial year
over year declines, which we believe will continue to moderate during
2003. Strong demand for our recently launched color and office
monochrome multifunction products as well as increased print volumes
led to growth in these revenues which largely offset declines in older
technology light lens revenue. Equipment sales grew 3 percent
including a 6 percentage point benefit from currency and reflect the
success of the numerous 2002 product launches mentioned above. Post
sale and other revenue declined 4 percent as a 5 percentage point
benefit from currency was more than offset by DMO declines, a
reduction in the number of light lens copiers at customer locations
and related page volume declines. Finance income declined 5 percent
including a 5 percentage point benefit from currency. The Finance
income decline reflected reduced equipment sales, the 2002 sale of our
financing business in Italy as well as our partial exit from the
leasing business in Germany, the Netherlands and several DMO
countries.

                                                 Three Months Ended 
                                                     March 31,
                                                   2003    2002 Change
                                             -------------------------

Net Loss (in millions)                           $  (65) $ (114) $  49
Diluted Loss per share                           $(0.10) $(0.16) $0.06

The first quarter 2003 net loss of $65 million or $0.10 cents per
diluted share included a $183 million after-tax charge ($300 million
pre-tax) related to the Berger v. Retirement Income Guarantee Plan
Litigation, after-tax restructuring charges of $5 million ($8 million
pre-tax), and certain net foreign tax benefits of $13 million. Our
underlying financial results include the effective implementation of
cost and expense actions, which were accelerated in the fourth quarter
2002 and have resulted in increased gross margins and reduced selling,
administrative and general (SAG) expenses. The first quarter 2002 net
loss of $114 million or $0.16 cents per diluted share, included a
goodwill impairment charge of $63 million associated with the adoption
of SFAS No. 142, after tax restructuring charges of $101 million ($146
million pre-tax), an after tax charge of $44 million for permanently
impaired capitalized software ($72 million pre-tax), a $10 million
civil penalty associated with our settlement with the SEC, net after
tax losses from unhedged foreign currency exposures of $22 million
($24 million pre-tax) and an after-tax gain of $12 million ($19
million pre-tax) related to the sale of Prudential common stock. The
average common shares outstanding in the first quarters of 2003 and
2002 were 742 million and 726 million, respectively.

Operations Review

Revenues for the three months ended March 31, 2003 and 2002 were as
follows:


(in millions)                   Production Office   DMO  Other  Total
------------------------------- ---------- ------- ----- ----- -------

2003
     Equipment Sales                 $214    $557   $81   $46    $898
     Post Sale and Other              755   1,129   279   445   2,608
     Financing                         96     148     3     4     251
                                ---------- ------- ----- ----- -------
     Total Revenue                 $1,065  $1,834  $363  $495  $3,757
                                ---------- ------- ----- ----- -------

2002
     Equipment Sales                 $230    $534   $69   $43    $876
     Post Sale and Other              746   1,148   374   450   2,718
     Financing                        104     155     5     -     264
                                ---------- ------- ----- ----- -------
     Total Revenue                 $1,080  $1,837  $448  $493  $3,858
                                ---------- ------- ----- ----- -------

Equipment sales of $898 million in the first quarter 2003 grew 3
percent from $876 million in the first quarter 2002, reflecting the
success of numerous 2002 product launches and a 6 percentage point
benefit from currency. In the first quarter 2003, approximately 50
percent of equipment sales revenue was generated from products
launched in the previous two years.

Production: 2003 first quarter equipment sales declined 7 percent from
the first quarter 2002 as lower monochrome installations and price
declines approximating 5 percent were only partially offset by
favorable currency, mix and color install growth. Production
monochrome installs declined just under 20 percent, reflecting
continued sizeable light lens declines and production publishing
reductions due to weakness in the graphic arts market and increased
competition, particularly in the digital light production market. The
Xerox 1010, our 101 page per minute digital device and first digital
light production device, was introduced in November 2002 and is
expected to have a larger impact in future quarters. Color equipment
sales growth reflected the combination of modest installation
increases and favorable mix, reflecting the launch of the DocuColor
6060 and DocuColor iGen3, which were partially offset by price
declines.

Office: 2003 first quarter equipment sales increased 4 percent from
the first quarter 2002 reflecting volume growth of approximately 15
percent. Volume growth was driven by multi function color and
monochrome multifunction reflecting the success of the Document Centre
500 series and DocuColor 1632 and 2240, all launched in June 2002.
Volume growth and favorable currency more than offset low double-digit
price declines associated with our more competitively priced offerings
and modestly weaker product mix.

DMO: Equipment sales in the first quarter 2003 grew 17 percent from
the 2002 first quarter reflecting approximately 20 percent volume
growth as we continue to transition new business to cash sales and
third party financing.

Post sale and other revenues of $2,608 million declined 4 percent from
$2,718 million in the first quarter 2002, including a 5 percentage
point benefit from currency. These declines reflect lower equipment
installations in previous quarters, as post sale revenue is largely a
function of the equipment placed at customer locations and the volume
of prints and copies that our customers make on that equipment as well
as associated services. First quarter 2003 supplies, paper and other
sales of $691 million (included within post sale and other revenue)
declined 2 percent from 2002 as supplies declines were only partially
offset by growth in paper and other sales. Supplies declines reflected
a lower installed base of equipment and reduced sales in the Small
Office / Home Office (SOHO) business, which we exited in 2001.
Service, outsourcing and rental revenue of $1.9 billion declined 5
percent from the 2002 first quarter predominantly due to lower DMO
rental revenues associated with a reduced equipment population and
currency devaluation in DMO.

Production: 2003 first quarter post sale and other revenue grew by one
percent as favorable currency and improved mix, driven by an increased
volume of color pages, were partially offset by double-digit page
volume declines in older technology light lens equipment.

Office: 2003 first quarter post sale and other revenue declined 2
percent as page volume declines exacerbated by unfavorable price and
mix, more than offset favorable currency. Page volume declines reflect
a significant reduction in pages generated from our older technology
light lens products and more than offset double-digit page growth from
our monochrome multifunction and color products.

DMO: 2003 first quarter post sale and other revenue declined 25
percent due largely to a lower number of machines at customer
locations, page volume declines and currency devaluation. The lower
machine population is the result of our focus on profitable revenue
and transition to third party financing.

Other: 2003 first quarter post sale and other revenue declined one
percent from the 2002 first quarter as declines in SOHO more than
offset the impact of favorable currency.

Key Ratios and Expenses

                                                  Q1        Q1
                                                2003       2002
                                            -----------------------
         Gross Margin
            Sales                              37.0 %      35.4 %
            Service, outsourcing and rentals   43.2        42.2
            Financing                          63.3        65.2
            Total                              41.9        41.0
         R&D % revenue                          6.3         6.0
         SAG % revenue                         27.1        30.3

First quarter 2003 total gross margin of 41.9 percent improved 0.9
percentage points, from 41.0 percent in the first quarter 2002,
despite increased U.S. pension and other employee benefit expenses
totaling $22 million or 0.6 percentage points in the first quarter
2003. Sales gross margins improved 1.6 percentage points to 37.0
percent in the first quarter 2003, driven by improved manufacturing
productivity and spending reductions which more than offset the
adverse impact of planned lower prices on new products, competitive
price pressure and the benefit expense increase. Service, outsourcing
and rentals margin improved one percentage point to 43.2 percent
primarily reflecting reduced service expenses, despite increased
benefit expenses, and improved document outsourcing productivity.
First quarter 2003 financing gross margin declined 1.9 percentage
points year over year but has improved during recent quarters in line
with declining market interest rates.

Research and development (R&D) expense of $236 million in the 2003
first quarter was $6 million higher than the first quarter 2002
including increased U.S. pension and other employee benefit expenses
and continued investment in technological development, particularly in
color. First quarter 2003 R&D spending is at a level that we believe
is adequate to remain technologically competitive. Xerox R&D remains
strategically coordinated with that of Fuji Xerox.

Selling, administrative and general (SAG) expenses of $1,020 million
in the 2003 first quarter declined $149 million from the 2002 first
quarter. The 2002 first quarter included a $72 million capitalized
software write-off related to customer service software and spending
of approximately $20 million related to our sponsorship of the Winter
Olympics. 2003 first quarter SAG expense reductions reflect the
benefit from previous restructuring actions, partially offset by a $25
million increase in U.S. pension and other employee benefit expenses.
First quarter 2003 bad debt expense of $56 million was $47 million
lower than the first quarter 2002 due to lower provisions in certain
DMO countries and North America. The provision improvement in DMO
reflects lower revenue levels and improved aging and write-off trends.
Lower North America provisions relate to improved customer
administration and tighter credit policies.

In the first quarter 2003, we recorded restructuring and asset
impairment charges totaling $8 million ($5 million after taxes) in
conjunction with our Fourth Quarter 2002 Restructuring Program. These
charges primarily consisted of pension settlements. The remaining
restructuring reserve balance at March 31, 2003 for all restructuring
programs was $229 million, the majority of which will be spent during
the balance of 2003.

Worldwide employment of 64,700 declined 3,100 from the 2002 fourth
quarter primarily reflecting reductions due to our restructuring
programs.

In the first quarter 2003, we recorded a $300 million litigation
charge relating to the Berger v. Retirement Income Guarantee Plan
(RIGP) litigation. This case is discussed in more detail in the Recent
Events section of this document.

Other expenses, net for the quarters ended March 31, 2003 and 2002
were as follows:

 (in millions)                                      2003      2002
 ---------------------------------------------- --------- ---------

 Non-financing interest expense                     $110       $89
 Currency losses, net                                  1        24
 Amortization of intangible assets                     9        10
 Loss (Gain) on business and asset sales               2       (19)
 Interest income                                     (10)      (21)
 Legal and regulatory matters                          -        10
 All other, net                                        9         5
                                                --------- ---------
     Total                                          $121       $98
                                                ========= =========

First quarter 2003 non-financing interest expense was $21 million
higher than the 2002 first quarter reflecting both the higher variable
interest rate associated with the New Credit Facility as well as the
related amortization of debt issuance costs. These costs were only
partially offset by lower average debt balances and lower
mark-to-market losses on our interest rate swaps, which were $5
million and $22 million in the first quarters of 2003 and 2002,
respectively.

In the first quarter 2003, the cost of hedging our foreign currency
denominated exposures in the majority of our key markets was almost
entirely offset by exchange gains in markets where we have been unable
to restore economic hedging capability. In the 2002 first quarter, we
incurred $24 million of exchange losses, primarily in Argentina due to
the devaluation of the Argentine peso.

The first quarter 2003 loss on business and asset sales related to
certain small DMO affiliates. The 2002 first quarter gain related to
the sale of stock resulting from the Prudential Insurance Company
demutualization.

Interest income is primarily derived from our invested cash balances.
Lower invested cash balances and lower average interest rates in the
first quarter 2003 resulted in a reduction in interest income compared
to first quarter 2002.

Legal and regulatory matters for the first quarter of 2002 consisted
of the SEC civil penalty in connection with our 2002 settlement.

In the first quarter 2003 we recorded income tax benefits of $53
million compared to $23 million of tax benefits in the first quarter
2002. The effective tax rate for the first quarter 2003 and 2002 was
48.2 percent and 37.7 percent, respectively. The first quarter 2003
tax benefits included $13 million of net benefits arising in foreign
jurisdictions.

Our effective tax rate will change based on nonrecurring events (such
as restructuring initiatives) as well as recurring factors including
the geographical mix of income before taxes and the related tax rates
in those jurisdictions. We expect that our full year 2003 effective
tax rate will approximate 40 percent.

Equity in Net income of unconsolidated affiliates consists of our 25
percent share of Fuji Xerox income as well as income from other
smaller equity investments. Higher equity in net income for the first
quarter 2003 primarily reflects the improved operating results of Fuji
Xerox.

Minorities interest in earnings of subsidiaries was $22 million in the
first quarter 2003, primarily representing the distributions, net of
tax, on our mandatorily redeemable preferred securities.

Capital Resources and Liquidity

Cash Flow Analysis

The following summarizes our cash flows for the three months ended
March 31, 2003 and 2002 as reported in our Condensed Consolidated
Statements of Cash Flows:


                                                 Three Months Ended
                                                       March 31,
                                               --------------------
(in millions)                                      2003       2002
---------------------------------------------- --------- ----------

Operating Cash Flows                               $159       $143
Investing Cash Usage                                (94)       (67)
Financing Cash Flows                                 88        704
Effect of exchange rate changes                      (5)       (23)
                                               --------- ----------
Increase in cash and cash equivalents               148        757
Cash and cash equivalents at beginning of
 period                                           2,887      3,990
                                               --------- ----------
Cash and cash equivalents at end of period       $3,035     $4,747
                                               ========= ==========

First quarter 2003 cash flows from operating activities were $159
million and reflect $474 million of pre-tax income before non-cash
items and net receivable reductions of $158 million. The receivables
reductions reflect the collection of receivables from prior year's
sales without an offsetting receivables increase due to lower revenues
in previous quarters and our transition to third party vendor
financing arrangements in Italy, Brazil, Mexico and the Nordic
countries. These positive items were partially offset by $194 million
of net payments of accounts payable and other liabilities and $180
million of restructuring cash payments. 2002 first quarter operating
cash flow of $143 million included a $346 million cash tax payment on
the previous sale of half our interest in Fuji Xerox. Excluding this
tax payment, the 2003 first quarter operating cash flow year over year
decline is primarily attributable to a $201 million increase in net
cash payments associated with accounts payable and other liabilities,
a $58 million increase in restructuring payments and the absence of a
$57 million inventory benefit realized in the 2002 first quarter. The
balance of the decline related to lower sales and other working
capital uses.

Cash flows from investing activities for the quarters ended March 31,
2003 and 2002 primarily consisted of increases in restricted cash
related principally to our secured financing activity as well as
capital and internal use software spending. The 2002 first quarter
also includes proceeds from the sale of certain manufacturing
locations to Flextronics as well as our investment in Prudential
common stock.

Cash flows from financing activities for the quarter ended March 31,
2003 included net proceeds from secured borrowing activity with GE and
other vendor financing partners of $354 million. These proceeds were
partially offset by $227 million of debt repayments under the New
Credit Facility, other debt payments of $31 million and dividends on
our Series B ESOP Convertible Preferred Stock of $11 million.
Financing activities for the first quarter 2002 consisted of proceeds
from our 9.75 percent Senior Notes offering of $746 million and net
proceeds from secured borrowing activity with GE and other vendor
financing partners of $113 million, partially offset by scheduled debt
payments of $157 million.

Finance Receivables Strategy

During the quarter ended March 31, 2003 we originated loans, secured
by finance receivables, generating cash proceeds of $813 million.
These loans bring the proportion of total finance receivables, which
are secured to 54 percent. We expect to increase the proportion of our
finance receivables that are securitized to approximately 60 percent
by the end of the year.

The following table compares finance receivables to financing-related
debt as of March 31, 2003:

  (in millions)                          Finance          Debt (2)
                                        Receivables
  ----------------------------------- ------------------------------

  Finance Receivables Encumbered by
    Loans(1) :
       GE Loans - U.S. and Canada           $3,286         $3,068
       Merrill Lynch Loan - France             388            383
       U.S. Asset-backed notes                 200             83
       GE Loans - Germany                       96             96
                                      ------------- --------------
  Subtotal - SPEs                            3,970          3,630
       GE Loans - UK                           657            522
       Other Europe                            118            115
                                      ------------- --------------
  Total - Finance Receivable
    Securitizations                         $4,745         $4,267
                                                    ==============
  Unencumbered Finance Receivables          $4,056
                                      -------------
  Total Finance Receivables(3)              $8,801
                                      =============



    (1) Encumbered Finance receivables represent the net book value of
        finance receivables that secure each of the indicated loans.

    (2) Represents the debt secured by finance receivables, including
        transactions utilizing SPE's.

    (3) Includes (i) Billed portion of finance receivables, net (ii)
        Finance receivables, net and (iii) Finance receivables due
        after one year, net as included in the condensed consolidated
        balance sheets as of March 31, 2003.

As of March 31, 2003, debt securitized by finance receivables
represented approximately 30 percent of total debt. As we increase the
proportion of our finance receivables that are securitized, we expect
the proportion of our debt, which is securitized by finance
receivables to increase to approximately 46 percent by the end of
2004.

Debt

Our scheduled quarterly debt maturities for the remainder of 2003 and
2004 are as follows:

(in millions)          2003      2004
                   --------- ---------

First Quarter             -    $1,082
Second Quarter       $1,507       959
Third Quarter           676       953
Fourth Quarter        1,857     1,138
                   --------- ---------
Full Year            $4,040    $4,132
                   ========= =========

Of the full year amounts shown in the above table, $1,779 million and
$1,610 million for 2003 and 2004, respectively, relates to debt
secured by finance receivables.

The following table summarizes our secured and unsecured debt as of
March 31, 2003 (in millions):


New Credit Facility - debt secured 
 under the 20% net worth limitation                        $854 (1)
New Credit Facility - debt secured 
 outside the 20% limitation                                  50
Debt secured by finance receivables                       4,267
Capital leases                                               40
Debt secured by other assets                                 78
                                                       ---------
         Total Secured Debt                               5,289
                                                       ---------
New Credit Facility - unsecured                           2,359 (1)
Senior Notes                                                862
Subordinated debt                                           579
Other                                                     5,226
                                                       ---------
         Total Unsecured Debt                             9,026
                                                       ---------
         Total Debt                                     $14,315
                                                       =========

    (1) The amount of New Credit Facility debt secured under the 20%
        Consolidated Net Worth limitation represents an estimate based
        on Consolidated Net Worth at March 31, 2003 and an estimate of
        the amount of other debt, as defined, secured under the 20%
        limitation. Any change to the amount indicated would
        correspondingly change the amount of the unsecured portion of
        the New Credit Facility.

Recent Events

France Securitization with Merrill Lynch

In April 2003, we signed a 4-year agreement with Merrill Lynch,
whereby the majority of lease receivables in France will be financed
through ongoing securitizations based on new lease originations. The
new agreement is in addition to the $362 million received from Merrill
Lynch in the fourth quarter 2002 and calls for the provision of
funding through 2007 of up to 350 million Euros outstanding at any
time. The agreement will become effective in June 2003 and allows for
Merrill Lynch to securitize our lease receivables at
over-collateralization rates of approximately 10 percent.

Payment of Convertible Debt due 2018

As of March 31, 2003 we had $560 million of convertible debt due 2018.
This debt, which is included in the second quarter 2003 debt
maturities, contained a put option that requires us to purchase any
debenture, at the option of the holder, on April 21, 2003, at the then
outstanding value. Consequently, on April 21, 2003, nearly all of the
outstanding debentures were put back to us and were settled in cash on
April 22, 2003.

Berger, et al v. RIGP

In the first quarter 2003, we recorded an after-tax litigation charge
of $183 million relating to the Berger v. Retirement Income Guarantee
Plan (RIGP) litigation; a case brought against our primary U.S.
pension plan for salaried employees. This represents a 25-cent per
share charge in our first-quarter 2003 results.

RIGP is appealing a ruling made in September 2002 by the United States
District Court for the Southern District of Illinois. External counsel
and RIGP continue to believe that the appeal has merit and that the
district court's judgment should be overturned. However, following the
oral argument of the plan's appeal to the Seventh Circuit Court of
Appeals on April 9, 2003, we reassessed the level of probability for a
favorable outcome. Under relevant accounting standards, the results of
the reassessment require us to take a charge for the amount of the
judgment.

If the district court ruling is upheld on appeal, any final judgment
would be paid from RIGP assets. Should we need to make a cash
contribution to compensate for any potential shortfall in the plan
related to this litigation, we do not expect to begin doing so until
2005.

Forward-Looking Statements

This earnings release and financial review contain forward-looking
statements and information relating to Xerox that are based on our
beliefs as well as assumptions made by and information currently
available to us. The words "anticipate," "believe," "estimate,"
"expect," "intend," "will" and similar expressions, as they relate to
us, are intended to identify forward-looking statements. Actual
results could differ materially from those projected in such
forward-looking statements. Information concerning certain factors
that could cause actual results to differ materially is included in
our 2002 Form 10-K filed with the SEC. We do not intend to update
these forward-looking statements.

   Short Name: Xerox Corp.
   Category Code: QRF
   Sequence Number: 00004210
   Time of Receipt (offset from UTC): 20030423T024224+0100

    --30--SDS/ny*

    CONTACT: Xerox Corporation
             James A. Ramsey
             Director, Investor Relations
             203-968-3807
             James.Ramsey@usa.xerox.com
             Fax (203) 968-3944
             
             Cynthia B. Johnston
             Manager, Investor Relations
             203-968-3489
             Cindy.Johnston@usa.xerox.com
             Fax (203) 968-3944
             
    KEYWORD: CONNECTICUT UNITED KINGDOM INTERNATIONAL EUROPE
    INDUSTRY KEYWORD: COMPUTERS/ELECTRONICS HARDWARE PUBLISHING 
EARNINGS 
    SOURCE: Xerox Corporation

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